G-SIBOs (Global Systemically Important But Overlooked):The Collective of U.S. Households

In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any individual entity, group or component of a system, which can be contained therein without harming the whole system. This definition can clearly be applied to the financial crisis of 2007-2008 and to all its constituting parties, be they the banking sector, the mortgage bondholders or the collective of individual mortgagors in the U.S. The systemic risks to the lenders have been well documented, but for the borrowers the same does not apply. For the latter, the fact that, between 2005 and 2014, more than 45% of homeowner-occupiers with a mortgage were confronted with foreclosure proceedings, implies that the funding structure of the total U.S. mortgage portfolio made mortgagors vulnerable to loan default pressures: a serious systemic risk for mortgagors. Such pressures do not arise overnight, but rather over a number of years. How this pressure did grow, will be shown with the help of two indices: one which shows the link between mortgage debt to income by comparing the total U.S. mortgage debt with the nominal GDP levels and the second one the link between the annual mortgage lending volumes and the average new house prices during the same years. The second one is split into one index based on actual average house prices and another one on house prices adjusted for CPI inflation. The paper covers the period from 1997-2015. One cannot solve household’ systemic risk factors as if this is an individual household’s own problem. It was a collective problem caused by systemic factors. Managing such events should have been organized on a collective basis. The sooner it is recognized that the collective of mortgagors can experience systemic risk pressures –just like banks and mortgage bondholders-, the quicker solutions can be found to overcome such pressures. If, by 2003, the priority had been given to solving systemic risks to the U.S. mortgagors, the U.S. and quite a few other countries would have been in a much better place at present.